Question

The following trial balance relates to Rapcap plc at 31 December 2019:

	£000	£000
Land and Building – at cost 1/1/ 2019	350,000
Accumulated depreciation of building at 1/1/ 2019		50,000
Plant at cost	108,600
Accumulated depreciation of plant at 1/1/ 2019		24,600
Investment property – at valuation 1/1/2019	30,000
Investment income		1,200
Purchases	158,450
Distribution costs	26,400
Administrative expenses	27,200
Loan interest paid	3,400
Inventory at 1/1/ 2019	26,550
Corporation tax under-provided for 2018	250
Trade receivables/ trade payables	30,950	35,300
Revenue		313,000
Equity shares of 20p each fully paid		150,000
Retained earnings at 1/1/2019		121,400
8% loan note (redeemable 2025)		42,500
Revaluation reserve at 1/1/2019(arising from land and buildings)		18,500
Deferred tax		9,000
Bank	3,700
	765,500	765,500

The following notes are relevant:

1. At 1 January 2019, Rapcap plc had its land and buildings revalued to £400 million. This valuation includes a value for land of £80 million. The estimated remaining life of the building at that date was 40 years. Depreciation of buildings is charged on a straight-line basis and is allocated 70% to cost of sales, 20% to distribution costs and 10% to administrative expenses.

2. During the year, Rapcap plc manufactured an item of plant that it is using as part of its own operating capacity. The details of its cost, which is included in cost of sales in the trial balance, are:

	£000
Direct materials cost	9,000
Direct labour cost	6,000
Installation costs	2,000
Pre-production testing	2,000
Directly attributable overheads	3,000
General and administrative overheads	2,500

The manufacture of the plant was completed on 30 September 2019 and the plant was brought into immediate use, but its cost has not yet been capitalised.

3. All plant is depreciated at 20% per annum (time apportioned where relevant) using the reducing balance method and charged to cost of sales.

4. On 1 January 2019, Rapcap plc acquired plant and machinery which had a cost of £30 million. The company traded in (part-exchanged) an old item of plant for a value of £10 million and paid cash of £20 million. The cash transaction has been accounted for in the trial balance above, but the trade-in has not yet been recorded. The plant traded in had been bought on 1 January 2017 at a cost of £12.5 million.

5. The investment property is let at commercial rates to tenants who are not connected to the company in any way. Rapcap plc adopts the fair value model in its accounting treatment of the asset. At 31 December 2019, the property had a value of £35 million.

6. The inventory at 31 December 2019 was valued at cost of £28.5 million. This includes £4.5 million of slow-moving goods. Rapcap plc is trying to sell these to another company, but has not been successful in obtaining a reasonable offer. The best price it has been offered is £2 million.

7. The Corporation tax account in the trial balance represents the under-provision of the previous year’s estimate. The estimated Corporation tax liability for the year ended 31 December 2019 is £9.2 million. At 31 December 2019 there were £42.5 million of taxable temporary differences. The Corporation tax rate is 20%.

Required:

1. Prepare for Rapcap plc, a Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2019 and
2. A Statement of Financial Position as at 31 December 2019

(Note: A Statement of Changes in Equity is NOT required)

3. A schedule of movements in property, plant and equipment for the year ended 31 December 2019
4. The following ratios have been extracted from industry averages:

Current ratio	1.50
Quick ratio	0.90
Inventory days	80 days
Receivable days	40 days
Payable days	40 days

Calculate the relevant ratios for Rapcap plc and comment on the liquidity position of the company and its management of working capital.

Answer 1

Working Notes:- (All figure in million)

1. calculation of depreciation on building:- (400-80)/40=8

allocation of depreciation :- to cost of sales= 8*70%=5.6,

to distribution cost= 8*20%=1.6,

to administration exp.= 8*10%= 0.8

2. Calculation of value of palnt which is manufactured in company:-

Direct materials cost	9,000000
Direct labour cost	6,000000
Installation costs	2,000000
Pre-production testing	2,000000
Directly attributable overheads	3,000000
General and administrative overheads	2,500000

Total Cost (9000+6000+2000+2000+3000+2500)= 24500000 i.e 24.5 million

So Depreciation on Plant for 6 months = (24.5*20%)/2= 2.45

3. Calculation of Profit and Loss on trade of palnt:-

Cost of Plant as on 01 january 2017= 12.5

Dep for year ended 31 december 2017= 12.5*20%= 2.5

Dep for year ended 31 december 2018= (12.5-2.5)*20%= 2

So value of plant as on 01 january 2019 is (12.5-2.5-2)= 8

Trade value of old plant = 10

so profit on trade of plant = (10-8)= 2

4. Formula of Cost of Sales: Beginning Inventory + Raw Material Purchase + Cost of Direct Labor + Overhead Manufacturing Cost – Ending Inventory

5. Calculation of Closing Inventory= 28.5-4.5+2= 26

6. Depreciation on Plant : (108.6-8-24.6)*20%= 15.2

A. Statement of Profit and Loss for year ended 31st December 2019 - (All figure in Million)

Revenue : 313

Invesment income: 1.2

Profit on Trade of old Plant: 2

Total Revenue(A) : (313+1.2+2)= 316.2

Less : Cost of Sales: {26.55+158.45+26.4-26+} = 185.4   

+ Value of Plant which have to be Capitalised: 24.5

+ Depreciation on Building wrongly included (5.6+1.6) :7.2

Net Cost of Sales :(185.4+24.5)=    217.1

Less: Other Expenses and Depreciation   

Administrative Expenses : (27.2-0.8)= 26.4

Depreciation (8+2.45+15.2) = 25.65

Loan Interest Paid= 3.4

Other Expenses and Depreciation (26.4+25.65+3.4)=   55.45

Total Operating Expenses (B) ( 217.1+55.45) = 272.55

Profit before Tax (A-B) i.e. (316.2-272.55)= 43.65

Less: Corporation Tax @ 20% (8.73)

So Profit After Tax: 34.92

B. Statement of financial position

Equity Capital : 150

Revenue Reserve (18.5+5) : 23.5

Retained Earnings (121.4+34.92) : 156.32

8% Loan : 42.5

Trade Payables: 35.3

Deferred Tax :(9-8.73-0.25) : 0.02

Total Liabilties (A) : (150+23.5+156.32+42.5+35.3+0.02)= 407.64

Land and Building (400-8) : 392

Plant And Machinery (60.8+22.05) : 82.85

Invesment Property : 35

Bank : 3.7

Trade Receivable : 30.95

Closing Inventory : 26

Total Assets (B) : (392+82.85+35+3.7+30.95+26) : 570.5

Net Financial Position (B-A) i.e. (570.5-407.64) : 162.86

C. Calculation Of ratio

Current Ratio : 26+30.95+3.7/35.3 = 1.72

Ouick Ratio = 30.95+3.7/35.3 = 0.98

Receivable Days = (Trade Receivable/net credit sales) *365= (30.95/313)*365 = 36 Days

Payable Days=   (Trade Payable/net credit Purchase) *365= (35.3/158.45)*365 = 81 Days